Economic Development, Legality, and the Transplant
Effect
By: Daniel Berkowitz, Katharina Pistor, and Jean-Francois Richard
Working Paper Number 308
February 2000
William Davidson Institute Working Paper Number 308
Economic Development, Legality, and the Transplant Effect*
Daniel Berkowitz**
Department of Economics
University of Pittsburgh
Pittsburgh, PA, USA, and
Davidson Institute, University of Michigan
Katharina Pistor
Kennedy School of Government, Harvard University
Cambridge, MA
Jean-Francois Richard
Department of Economics
University of Pittsburgh
Pittsburgh, PA, USA
First Draft: November 1999
This draft: February 2000
Abstract
We analyze the determinants of effective legal institutions (legality) using data from 49 countries. We show
that the way the law was initially transplanted and received is a more important determinant than the supply
of law from a particular legal family. Countries that have developed legal orders internally, adapted the
transplanted law, and/or had a population that was already familiar with basic principles of the transplanted
law have more effective legality than countries that received foreign law without any similar predispositions. The transplanting process has a strong indirect effect on economic development via its impact
on legality.
Keywords: transplant versus origin; receptive, unreceptive, direct and indirect transplants; legality
JEL Classification Codes: O1, O57, K00
*We would like to than Jan Kleinheisterkamp (Max Planck Institute, Hamburg), for his help with
background information on Latin America and the coding of these countries. We are also grateful to the
comments of seminar participants at the World Bank and the University of Wisconsin-Madison.
**Corresponding author: Department of Economics, University of Pittsburgh, Posvar Hall 4D10,
Pittsburgh, PA, 15260. Email: [email protected]., fax: 412-648-3011, tele: 412-648-7072.
William Davidson Institute Working Paper Number 308
1.
Introduction.
It is increasingly recognized that Law plays an important role in economic development, and
various approaches have been used to measure its quality. One approach is to measure the quality of law on
the books, which entails identifying key indicators of good rules and, then analyzing whether or not the
relevant statutes of a given country include these indicators. For example, one can identify a set of rules that
appear to be relevant for protecting minority shareholders and test how many of these indicators are actually
included in the laws of different countries. Another approach is to measure the extent to which rules are
effectively enforced. Survey data that measure the effectiveness of the judiciary, rule of law, the absence of
corruption, low risk of contract repudiation and low risk of government expropriation observed during
1980-1995 are five common measures. In this paper, we use the term legality to capture the effectiveness of
institutions that enforce the law, rather than the quality of the law on the books.
Figure 1 illustrates the relationship between economic development and legality using a 49-country
data set compiled by La Porta et al. (1997; 1998). Log GNP per capita in 1994 proxies for economic
development; a weighted average of the five previously mentioned legality variables proxies for legality.
Figure 1 plots log GNP per capita against log legality: it also plots the fitted line obtained from regressing
log GNP per capita against log legality and a constant term. There is substantial variance in economic
development in our sample: after converting from its log representation, GNP per capita ranges from 270 to
35,760 dollars in 1994. The strong association observed between economic development and legality in our
sample is striking. The estimated linear regression coefficient implies that a 1-percent increase in legality is
associated with a 4.75-percent increase in GNP per capita. The regression coefficient is statistically
significant at the 1-percent level, and legality explains roughly 83-percent of the variance in economic
development.
The strong association between legality and economic development could mean simply that rich
countries can afford better institutions. An alternative explanation is that good legal institutions are a
precondition for long-term economic growth and development. In his analysis of economic history, North
(1981)) argues that the emergence of law enforcement systems to protect private business activity has
played a critical role in rapid industrialization. A growing literature emphasizes the crucial role of
institutions, including legal institutions, for sustained economic growth (Knack and Keefer 1994; Landes
1998; Mauro 1995; Milgrom, North and Weingast 1990; North 1990; Williamson 1985). Just what explains
the substantial variance in legality across countries is, however, an open question. Legal technical assistance
programs that focus primarily on improving the statutory laws in developing countries assume that
supplying the right laws on the books will enhance legality, and ultimately economic development.
However, many of these programs have not produced the expected results.1 This is not surprising since legal
1
The most glaring example is Russia, where the drafters of the corporate code now concede that the idea of
picking the right laws and thereby enhance corporate governance has essentially failed (Black, Kraakman
and Tarassova 1999).
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scholars have long noted that the quality of law on the books does not ensure the laws will actually be
enforced (Pound 1911).
This paper develops and tests the proposition that the way in which the modern formal legal order
that evolved in some Western countries was transplanted into other countries is a much more important
determinant of legality and economic development today than the supply of a particular legal code. Our
argument is based on two key notions. First, for the law to be effective, it must be meaningful in the context
in which it is applied so citizens have an incentive to use the law and to demand institutions that work to
enforce and develop the law. Second, the judges, lawyers, politicians, and other legal intermediaries that are
responsible for developing the law must be able to increase the quality of law in a way that is responsive to
demand for legality.
In order to test our theory, we develop proxies for the way in which law has been transplanted and
received and the supply of particular legal codes. Regarding supply, we note that countries around the world
are commonly divided into four legal families: English-common law, French-civil law, German-civil law,
and Scandinavian-civil law. Legal scholars show that these families differ significantly in style. 2 However,
in a path breaking study La Porta et al (1998) demonstrate that there is a significant difference in the quality
of the laws between legal families at least with respect to investor protection laws (shareholder and creditor
rights). We thus use legal families as a proxy for the contents and quality of the supplied law.
In order to proxy for the way in which the law has been transplanted and received, we develop a
definition of the ”transplant effect”. Countries can also be classified into those that developed their formal
legal order internally (origins) and those that received their formal legal order externally (transplants). In
order to make this classification, we choose the period during which a country first developed or received a
comprehensive formal legal order. For most countries, the relevant period is the nineteenth century; for
some it reaches into the first half of the twentieth century. Our basic argument is that for law to be effective,
a demand for law must exist so that the law on the books will actually be used in practice and legal
intermediaries responsible for developing the law are responsive to this demand. If the transplant adapted
the law to local conditions, or had a population that was already familiar with basic legal principles of the
transplanted law, then we would expect that the law would be used. Because the law would be used, a
strong public demand for institutions to enforce this law would follow. And, legal intermediaries that are
responsible for developing and enforcing this imported law would be able to develop the law so at to match
demand, because the strong demand for law would provide resources for legal change. Where these
2
These include a specific working methodology of jurists; idiosyncratic legal concepts (i.e. the trust in
common law which is not known in the German or French legal systems); the sources of law and the
methods applied for interpreting it (i.e the role of precedents in common law and the supremacy of statutory
law in the codified civil law systems); and ideological factors in the sense that the prevailing
political/economic order is reflected in the rules (Glendon, Gordon and Osakwe 1994; Zweigert and Kötz
1998). The freedom of contract and the strong protection of private property, for example, are core
elements of most Western legal systems, but were absent in the socialist legal family, and modified by
religious principles in Hindu or Islamic law.
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conditions are present we would expect the legal order to function just as effectively as in an origin country
where the law was developed internally. However, if the law was not adapted to local conditions, or if it was
imposed via colonization and the population within the transplant was not familiar with the law, then we
would expect that initial demand for using these laws to be weak. Legal intermediaries would have a more
difficult time developing the law to match the demand. Countries that receive the law in this fashion are thus
subject to the ”transplant effect”: their legal order would function less effectively than origins or transplants
that either adapted the law to local conditions and/or had a population that was familiar with the
transplanted law.
Our econometric analysis shows that the "transplant effect" is a much more important predictor of
legality than the supply of particular legal families. Controlling for the supply of legal families, we find that
legality is 33 percent lower in transplant effect countries. Supplying German civil law only marginally
offsets the transplant effect: legality is 24 percent lower in countries within these legal family that are
subject to the transplant effect. The English common law and French civil law does not offset the transplant
effect, and the Scandinavian family has no measurable impact because it includes only origins. Furthermore,
it is not the case that only richer countries have better legality. Controlling for GNP per capita, the
transplant effect has a strong negative impact on legality.
Our econometric analysis also shows that the transplant effect influences economic development
indirectly through its impact on legality, and has no direct impact. We find that the transplant effect can
explain roughly 69-percent of the variance in legality, which in turn (as shown in figure 1) explains 83percent of the variance in GNP per capita. The transplant effect’s indirect impact is quite substantial. For
example, Ecuador received the French law during 1831-1881 without significant adaptation. Moreover, the
citizens of Ecuador were not familiar with the transplanted law. Had Ecuador been in a position to develop
its own legal system internally or to adapt the transplanted law better to its local conditions, back of the
envelope calculations suggest that its 1994 GNP per capita would have increased from $1,200 U.S. to
roughly Ireland’s level ($13,000 U.S.). The policy implication of this result is fundamental: a legal reform
strategy should aim at improving legality by carefully choosing legal rules whose meaning can be
understood and whose purpose is appreciated by domestic law makers, law enforcers, and economic agents,
who are the final consumers of these ruler. In short, legal reform must ensure that there is a domestic
demand for the new law, and that supply can match demand. The close fit between the supply and demand
for formal legal rules appears to be a crucial condition for improving the overall effectiveness of legal
institutions, which over time will foster economic development. While further research is warranted before
making practical policy recommendations, a cautious suggestion would be that legal borrowing should take
place either from a country with a similar legal heritage, or substantial investments should be made in legal
information and training prior to adoption of a law, so that domestic agents can enhance their familiarity
with the imported law and make an informed decision about how to adapt the law to local conditions. This
would at least increase the possibility that the new law will be used in practice. It is, however, vain to expect
that an effective transplant strategy will have a direct or immediate impact on economic development.
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There seems to be a moderate direct impact of supplying a particular legal family on economic
development. However, not only is the direct effect dominated by the indirect transplant effect, it also
appears sensitive to the impact of a few outliers, and might therefore proxy some other unobservable
effects. Thus, there is no reason to conclude from our analysis that a transplant strategy that favors a
particular legal family would make a significant difference.
The transplant effect, while strongly path dependent, is not irreversible. Several countries that
received law in the fashion of Ecuador have considerably better legality ratings than our model predicts.
Examples include Hong Kong, Taiwan, Singapore, Spain, and Portugal. Most, but not all, of these countries
have relatively recently overcome authoritarian rule in a peaceful manner and have made considerable
investments in their legal system, including a reform of the judiciary. These changes suggest a growing
demand for a formal legal order, which was met by a state that at least now was committed to investing into
and upholding a formal legal order. These results also suggest that even though our theory has strong
explanatory power, it does not explain everything. In particular, it does not capture how ethnolinguistic
fractionalization, or natural resource endowment, factors that – as others have shown – (La Porta et al.
1999; Mauro 1995; Sachs and Warner 1995) impact on the quality of government institutions.
This paper contributes to an emerging literature that attempts to explain the variance in legality
across countries. With the exception of work by La Porta et al (1997, 1998) and North (1990), to date most
of this work has been theoretical. For example, Skaperdas (1999) and Grossman and Kim (1995) develop
models that derive conditions under which citizens allocate resources to productive or predatory behavior
that undermines legality. There is also an emerging literature on just why legality emerges or fails to
emerge in formerly socialist economies that are making a transition to a market economy. Shleifer and
Vishny (1993) explain the emergence of corruption during the transition, and Berkowitz and Li (1999)
explain why Chinese local governments have been typically much more effective than Russian local
governments in providing a stable business environment. Roland and Verdier (1999) show how policies
observed in transition economies can be interpreted as mechanisms to improve legality.
The rest of this paper is organized as follows. In the next section, we develop our argument that the
way in which the law is transplanted is a critical determinant of legality, code our 49 countries accordingly,
and develop a definition of the transplant effect. In section three, we test the hypothesis that the way in
which the law was transplanted and received matters more than the supply of a particular family for the
effectiveness of legal institutions (legality). In section four, we analyze the relationship between economic
development, legality (represented by a weighted average of the legality proxies), and the transplant effect.
Section five addresses two important potential problems with our econometric analysis. Firstly, it examines
whether the use of a weighted average (principle component) legality variable might have distorted the
underlying story; secondly, it combines system inferential procedures (specification search and elimination)
with Monte Carlo simulation techniques to fully account for the fact that all implied coefficient restrictions
in our model are highly non-linear and that the sample size is relatively small. A striking finding is that the
techniques utilized virtually capture the full interaction between the demand and supply variables, the five
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legality proxies and economic development. A practical implication of this is that it is possible to extend
our analysis to include countries that have less than five of the legality proxies. Section 6 concludes with
policy implications and directions for future research.
2.
The Transplant Effect
Virtually all countries today have a set of rules embodied in codes or court cases that were
established by designated state organs, and state institutions in charge of enforcing these rules. We call this
set of rules the formal legal order. Although it is quite important in many countries today, the formal legal
order is but one element of the governance structure of society. All societies, including the most developed
ones, are also governed by informal norms and institutions. This informal legal order evolves over time
mostly by internalizing existing norms of a social group (Coleman 1990; Sunstein 1996). It is enforced not
by the state, but relies largely upon trust and reputation effects as well as monitoring devices. As we will
further discuss below, the existing formal legal order in most countries around the world was shaped by
transplanting formal legal systems that have evolved in several European countries in the late eighteenth
and early nineteenth centuries. While many, although not all of the countries that received these formal legal
orders from the West had formal legal orders prior to transplantation, the transplantation of the Western
formal legal systems accelerated the development of the formal legal order.
In this section we introduce the ”transplant effect” in order to characterize the transplanting
process. We propose that countries that have developed formal legal orders internally, adapted the
transplanted law to local conditions, and/or had a population that was already familiar with basic legal
principles of the transplanted law should be able to further develop the formal legal codes and build
effective legal systems. By contrast, countries that received foreign legal systems without similar predispositions are much more constrained in their ability to develop the formal legal order and will have
greater difficulties to develop effective legal systems (the transplant effect). In order to test these
propositions empirically, we divide our 49 countries into ten that developed their formal legal order
internally (origins) and 39 that received their formal legal order externally (transplants); we then divide the
transplants into those that are and those that are not subject to the transplant effect. We conclude by
demonstrating the transplant effect with a simple model.
2.1
Origins vs. Transplants
Most countries derived their current formal legal order from Europe during the nineteenth century
and the early twentieth century. Earlier legal transplants are well known, including the reception of Roman
law in Europe, the enactment of the Chinese codes in other parts of Asia, or the transfer of Spanish and
Portuguese law to Latin America. Indeed, as Watson (1974) argues, legal transplants are as old as the law
is. The transplanting process that occured in the nineteenth and early twentieth centuries superseded all
earlier transplants. Moreover, despite lively borrowing and transplantation since then, most countries have
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retained the core characteristics of the legal system they had received during this period. The wholesale
transplantation of legal systems was made possible by the consolidation and formalization of legal systems
in Europe that coincided with the development of the nation state. The expansion of European influence
through war and conquest was primarily responsible for the transplantation of these laws to countries in
Asia, Africa, North America and Latin America, although some of these non-European countries
transplanted these laws voluntarily.
Three legal families, the English common law, the French civil law and the German civil law,
dominated the process of consolidation and formalization of formal legal orders in Europe. The English
common law has evolved over centuries and, in contrast to the French and German civil families, was never
systematized and codified. Case law, or precedents established by courts, defined legal principles that were
applied to other cases. The roots of the common law date back to the Norman conquest of England in 1066,
but only in the late fifteenth centuries was a firm body of legal principles established that replaced
preexisting customary law. The publication of law since the sixteenth century (Ross 1998) and the
development of legal reports - which was completed in the second half of the nineteenth century (Katz
1986) - contributed to the formation of a consistent body of law that was widely accessible. Statutory law
gained in importance in the nineteenth century, but case law remains the hallmark of the English legal
system to this day.
In continental Europe, codification resulted in a formal legal order that is very different than the
English common law. The French issued the first comprehensive national civil, commercial and criminal
codes, as well as separate civil and criminal procedure codes between 1804 and 1811. The French
(Napoleonic) codes consolidated legislation operating before the French revolution and codified existing
business practice (Katz 1986; Zweigert and Kötz 1998) in language that was systematic and accessible to
lay people. Politically, the codification movement manifested the superiority of the parliament over the
executive and the judiciary in making new law. The other major codification of the nineteenth century is the
German civil code of 1886, which had been preceded by commercial, criminal, civil and criminal procedure
codes, as well as a bankruptcy law. Codification in Germany was delayed until the end of the nineteenth
century primarily for political reasons. Only with unification in 1871, did codification move forward. The
German codes, in particular the civil code, differ from the earlier French codification. Legal scholars
compiled a consistent system of civil law based on Roman legal principles, and, as such, wrote codes that
were highly technical and thus much less accessible to lay people.
Most legal families operating currently are derived either from the English common law, the
French civil law or the German civil law. We denote England, France and Germany as origin countries, or
simply origins, because their formal legal orders developed largely internally and display highly
idiosyncratic features, some legal borrowing notwithstanding, and because their formal legal order served as
a model for other countries. Comparative legal scholarship also distinguishes a fourth legal family, the
Scandinavian one (Zweigert and Kötz 1998). The Scandinavian legal family is not built around a major
codification, like the French or the German legal family, nor does it have a body of case law like the
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English common law. However, early codification of existing business practices and the close political and
economic relations among the four Scandinavian countries have given rise to a legal system based on
statutory law, that is distinct from the legal systems described above. Thus, Denmark, Finland, Norway and
Sweden are origins.
In our 49 country-sample, the United States, Austria and Switzerland are also origins because the
development of their formal legal order was highly idiosyncratic. While English common law influenced the
legal system in the United States during the colonial period, legal development in the United States has
sharply diverged from the English system after the colonial period.3 Each new state that broke away from
the colony decided how much of the common law of England would be part of the new legal order (Posner
1998).4 Moreover, statutory law has played an increasingly important role since the adoption of the
American constitution.5 Austria and Switzerland are also origins. According to standard classification, both
countries belong to the German legal family. The codification that forms the basis of the Austrian civil law,
the AGBGB, was adopted in 1811, over ninety years before the adoption of the German civil code. It
influenced the development of the German code, rather than the other way around. The major Swiss
codification (the law on obligations of 1881 and the civil code of 1907) followed the German codification.
However, it did not incorporate Roman law to the same extent as the German codifications, and differs
considerably in style and organization from the German code (Zweigert and Kötz 1998). Table 1 lists the
ten origins in our sample and notes the time when these systems were formed. All other countries (or
territories that were later organized as independent states) received their formal legal orders, either
voluntarily or involuntarily, from these ten origin countries. We call these countries "transplants".
Table 2a summarizes the finding by La Porta et al. (1998) that the legal families capture
differences in the quality of law on the books. Shareholder rights and creditor rights are cumulative indices
developed in La Porta et al. (1998) that measure the quality of the protection of shareholder and creditor
rights by statutory law. The categorical means on the top half of table 2a show that the English have
strongest and the French have the weakest protection of shareholder and creditor rights, while the German
and Scandinavian families are in the middle. The p-values in the bottom half of table 2a show that these
difference in categorical means across the English family and the three civil law families are statistically
significant.6 Thus, the legal families are used as an indicator of the quality of the law supplied by different
legal families.
3
The distinctiveness of American law is apparent, when one compares it with the development of law in
Australia, Canada and New Zealand, all of which stayed much closer to the English common law system.
4
A similar process took place in other colonies when they became independent. This took place, however,
much later and had little impact on the formal legal order that developed initially in these territories.
5
This is evident, for example in the development of bankruptcy law in the two countries, which increasingly
diverged over time. According to Franks and Sussman, different patterns of law makin, or legal innovation
account for this. (Franks and Sussman 1999).
6
La Porta et al (1998) analyze all the indicators of shareholder and creditor rights and conclude that the
French have the worst investor-protection laws.
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In order to characterize the transplantation process, we note that a legal order existed in transplants
at the time when the European law was transplanted and that many countries had formalized at least part of
their legal systems. A legal order is a property of every society (Coleman 1990). Norms may be formalized,
i.e. embodied in written rules, or they may be based on conventions, customs, and remain informal. Most
societies today have both informal and formal legal systems.7 Many societies that received European law in
the nineteenth century were familiar with a formal legal order. Legal texts had a long tradition in Hindu,
Islamic and Chinese law. In content and style, these legal texts, however, differ substantially from the
modern European codification. For example, Hooker (Hooker 1978) shows that issues of morality are much
closer interwoven with legal rules and ambiguity rather than specificity characterizes their wording. Other
societies did not have a formal legal order that was embodied in codes or case law and enforced primarily
by the state. They were governed by an informal legal order that was enforced by social sanctions, including
reputation effects and mutual monitoring (Kronman 1985; Newman 1983). The social norms and
enforcement mechanisms used differed considerably from society to society.8 The preexisting legal order
typically persisted after the process of transplantation was complete. In part, this was the indended outcome.
In some instances, for example, the transplanted European law applied only to the European population,
while local people continued to be governed by local custom. This was true in particular for Dutch colonies
(Hooker 1975). In other cases, criminal and administrative law was applied to local people, but in family,
inheritance, but also commercial matters, local law prevailed. This was the practice in many English
colonies, although the jurisdiction of common law courts was often extended over time (Katz 1986; Knapp
1972). Even when transplanted law was not as clearly circumscribed, and therefore in principle applicable
to all subjects in all areas of the law, the government organs did not always enforce the transplanted formal
legal order against the indigenous population.
We do not have data on the effectiveness of the initial legal order and can only speculate at the
ability of countries to develop an effective legal order internally, had they not received the legal order from
the West. Our data, however, allow us to determine whether the transplantation of foreign law has helped or
hindered these countries to develop levels of legality that are comparable with those of origins. Legal
scholars have long observed that there is a gap between formal law on the books and law in action (Pound
1911). While this gap exists in origins, we would expect to observe a larger gap between law on the books
and law in action in transplants. The logic of this prediction follows from the idea that the law is primarily a
"cognitive institution" (Means 1980). This is self-evident with respect to the informal legal order.
Observance of this law requires knowledge of the customs and habits of a social group. The fact that formal
legal orders have put the key elements of the legal order in writing tends to disguise the fact that the
effectiveness of these rules also rests on knowledge and understanding of these rules and their underlying
values by social actors. While most members of society will not, and in fact need not, be familiar with the
7
There is an extensive literature on the importance of informal legal orders in the US, including (Bernstein
1992; Ellickson 1991; Macaulay 1962).
8
For an account of the complexity and variety of pre-colonial law in South/East Asia see (Hooker 1975).
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specifics of individual rules and regulations, they are familiar with the basic concepts of the legal order.
Moreover, they can rely on legal professionals as intermediaries, who have a better knowledge of the formal
legal order. But even for professionals to apply a special rule, they must not only grasp the wording of that
rule, but also the concept behind it, the value judgments on which its rests, and its position within the
overall legal order. Even a seemingly clear law - do not steal! - raises a host of interpretative problems when
applied to real world cases. What about taking from a common pool, or overgrazing? What about taking
something with the intention of returning it later, or picking up
an object that (apparently) has been abandoned by the owner? An identical rule like this one will be
interpreted differently by those charged with applying it and their understanding of the underlying values on
which this norm rests. This is true even within the same legal system. If this was not the case, countries
would not need several court instances and a supreme court with the task of ensuring the uniform
interpretation and application of the law.
When a transplant country applies a rule that it has transplanted from an origin, it is effectively
applying a rule to its own local circumstances that was developed in a foreign socioeconomic order. Thus,
we would expect that the interpretation of a legal rule will differ more within a transplant than an origin.
Applying a simple rule that prohibits stealing in the context of communal property is a case in point. Other
examples include:
1.
the enforcement of the freedom of contract principle in a society governed by kinship
relations or guangxi - the Chinese term that refers norms of reciprocity or more generally,
human emotions (Hamilton 1998);
2.
the introduction of the corporate form in pre-Revolutionary mainland China, where
mistrust in the state prevented entrepreneurs from registering their business with the state
(Kirby 1995);
3.
the introduction of the corporate form in a country like Colombia, which at that time
was dominated by a handful of state run enterprises, overwhelmingly agricultural production,
and state policies that discouraged the formation of private capital (Means 1980).
In each of the above cases the transplanted law was largely ineffective. In early 20th century
China, for example, family owned businesses frequently called themselves limited liability company but in
fact were unincorporated family owned businesses. In the words of Kirby, "it had become fashionable and
modern to attach the term youxian gongsi (limited company) to almost any enterprise. But it was not in
vogue to register with the government, even with the very weak central government of 1916-28" (Kirby
1995, p. 50). Even where the corporate form was used, outside finance was marginal, as kinship networks
provided the most important financial resources (Hamilton and Feenstra 1997). They also ensured that
obligations would be honored. And in Colombia, the introduction of the corporate law did not lead to the
establishment of corporations or the reorganization of existing partnerships. In fact, there is evidence that
knowledge of the existence of this law was not wide spread (Means 1980). The context specificity of formal
legal order has important implications for the effectiveness of the legal order (legality) in transplant
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countries. Where the meaning of specific legal rules or legal institutions is not apparent, they will either not
be applied or applied in a way that may be inconsistent with the intention of the rule in the context in which
it originated. This in turn has implications for the perception and trustworthiness of the institutions applying
them, and thus for the future demand for these institutions. However, if a transplant country adopts foreign
laws from origins in a way that is sensitive to its initial conditions, then the meaning of these rules becomes
clearer, and it is also simpler to develop institutions such as the courts, procurators, anti-trust agencies, etc.
that enforce these rules. We conjecture that there are two reasons for this. First, when the law is adapted to
local needs, people will use it and want to allocate resources for enforcing and developing the formal legal
order. Second, legal intermediaries responsible for enforcing and developing the formal legal order can be
more effective when they are working with a formal law which is broadly compatible with the preexisting
order, or which has been adapted to match demand.
Our core proposition is that legality is determined by the ability of a country to give meaning to the
transplanted formal legal order and to apply it within the context of its own socioeconomic conditions.
Countries that developed a formal legal order internally, i.e. origins, should develop more effective legal
institutions than countries that received the formal legal order externally by way of transplant. However,
there may be cases where the transplanted law is more or less compatible with the initial order and this
could offset the fact that law was transplanted. This possibility is reflected in our classification of different
transplants.
2.2
Receptive and unreceptive transplants
Table 3 distinguishes voluntary from involuntary transplants. Voluntary transplants are countries
that have made an informed decision to copy a foreign legal system. This decision may have been made
under pressure - as in the case of Japan during the Meji restoration, which had just been forced into signing
unequal treaties with Western powers. In light of this experience, the establishment of a modern legal
system was seen as a prerequisite for a an economically and military strong, independent country (Baum
and Takahashi 2000; Oda 1999). Yet, the choice of the legal system and its ultimate design was still in the
hands of the Japanese government. By contrast, involuntary transplants are countries on which a foreign
power imposed a formal legal order by colonization and/or war. Colonization usually establishes foreign
rule for long periods of time and leaves strong imprints on the institutions of a given country. Wars,
however, may be only short lived. Once they are over, the decision to retain or abrogate the legal system
that was imposed during the war is again in the hands of the domestic government. Large parts of Europe,
for example, received the French codes during the Napoleonic wars. These wars ended soon with the defeat
of France. After 1815 the countries on which the Napoleonic codes had been imposed were free to decide
whether or not to retain these codes. Most countries did, albeit on a preliminary basis. Many of these
countries subsequently initiated their own national codifications. They usually drew heavily on the French
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codes. But this time, the reception was voluntary, rather than involuntary. Since this national codification
rather than the earlier imposed Napoleonic codes have shaped their long term legal development, we call
them voluntary transplants. Thus, involuntary transplants in our data base are only countries on which a
foreign legal system was imposed during colonization. Table 3 shows that there are a total of 20 voluntary
and 19 involuntary transplants in our data base.
The fact that a transplant country voluntarily receives a formal legal order does not imply this
transplanted formal legal is compatible with its initial conditions. Domestic policy makers may decide to
copy the law and are free to choose from different models. The decision to import a foreign legal system
may, however, be determined by national pride, the desire to bring a country up to standards with the so
called "civilized world", or the hope to increase the prospects of foreign investments. None of these
considerations necessarily suggests that the formal legal order will be understood and can be meaningfully
applied to real world cases in the receiving country. This is the case only, if additional conditions exist, that
make a country receptive to the transplanted law.
Our argument is that a voluntary transplant increases its own receptivity by making a significant
adaptation of the foreign formal legal order to initial conditions, in particular to the preexisting formal and
informal legal order. Changes in the transplanted rules or legal institutions indicate that the appropriateness
of these rules has been considered and modifications were made to take into account domestic legal practice
or other initial conditions. Means (1980), for example, reports that Colombia voluntarily, but almost
blindly, transplanted the Spanish commercial code of 1829. The few changes were made in ignorance of the
implications of these rules for business practice. For example, a provision requiring state approval for the
formation of a corporation, which at the time was still common throughout Europe, was eliminated from the
books. Years later when the code was amended, this time using Chilean law as a model, state approval
became mandatory, despite the fact that this rule had meanwhile been liberalized in most other countries.
Adaptation does not necessarily require that the transplanted law is changed significantly. However, at the
very least, an informed choice about alternative rules must have been made. Extensive comparative research
prior to the adoption of a foreign legal system is indicative for an informed choice. A good example is
Japan, where extensive debates about the adoption of English or French law, and several drafts based on the
French model preceded the promulgation of codes that were largely based on the German model (Haley
1991; Oda 1999).
Another indicator that a voluntary transplant is receptive to formal legal order is that it has
familiarity with the legal system that it uses as a model for legal borrowing. Countries that share a common
legal history will be familiar with the transplanted legal concepts and will therefore have little reason to
make major adaptations or to choose a system that is less familiar to them. Common roots in the distant past
are, however, not sufficient. Most of the European countries can trace their legal history back to the Roman
Empire. Yet, quite distinct legal systems developed on the basis of the Roman law, which incorporated
centuries of legal practice that combined elements of Roman law with customary rules. Not all countries in
Europe shared this experience in the same way. Spain, for example had codified Roman law already in the
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thirteenth century and supplemented these rules periodically with imperial ordinances. However, Spain did
not develop the legal principles that gave rise to the modern business corporation or an elaborate system of
property rights based on the (political) recognition of the right to ownership. This also implies that Latin
America, which received Spanish law in the 16th century, was exposed to Roman legal heritage, not,
however, to the development of the private law, which formed the core of the formal legal orders that
emerged in Europe in the nineteenth century. Similarly, Greece can trace the roots of its legal system back
to the Roman law. In fact, the famous compilation of the classic Roman jurists' texts under emperor
Iustinian, the corpurs iuris civilis, which is the basis of the European Roman legal heritage, was a product of
the East Roman empire (Stein 1999). However, the Byzantine law Greece enacted in 1821 after
independence from Turkish rule differed significantly in content and style from the modern French law it
transplanted subsequently, despite the fact that the French law is also based on Roman law. Finally, the
legal development of Korea and Japan was long influenced by Chinese law (Haley 1991). But when Japan
transplanted its law to Korea, this was the new Japanese law that had been transplanted from Germany
(Hahm 1996a; Wang 1997) . There is no definite time limit to distinguish a distant legal heritage from a
more recently shared common legal history. From our discussion of law as a cognitive institution, it follows
that the common history must still be recognizable in legal practice at the time when the foreign law is
transplanted.
To summarize, if a voluntary transplant has familiarity with the country or countries from which it
takes the formal legal order, and/or it transplants the formal legal order with significant adaptation to its
initial conditions, then the voluntary transplant is receptive. Otherwise, the voluntary transplant is
unreceptive. These definitions are summarized in box 1; following these definitions, table 3 categorizes our
20 voluntary transplants into the receptive and unreceptive categories.
Involuntary transplants, under certain conditions, may also be categorized as receptive. Involuntary
transplants received their formal legal order as colonies, and this transmission process varied across
countries. As noted already, in the Dutch colonies, the foreign law applied primarily to members of the
colonizing power. English common law was introduced in the early colonies in a gradual fashion. The East
Indian Company established the first courts on the subcontinent, which applied English common law.
Whether this law applied only to the English subjects or also to the local population remained unclear for
decades. Only when the British government took over control from the company in the middle of the
nineteenth century was the general jurisdiction of the common law established. A court system, which
referred to the privy council as the highest court was created. For the purposes of transplanting English
common law to other parts of the empire, it was codified, which greatly accelerated the transplantation of
the common law to the Indian subcontinent and later to other parts of the empire. The introduction of
English common law to other countries was swifter. Kenya and Zimbabwe were colonized only at the end of
the 19th century. They received English law by decree, which stipulated that the law in force in England at a
certain day would now apply in the territory. Still, exemptions were sometimes made for certain matters of
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the law such as family inheritance (Mann and Robert 1991). Similar principles applied to the imposition of
French law in French colonies.
In some colonies, the transplantation of foreign law took quite a different form. The English
Empire distinguished between "settled" and "conquered" territories. Settled territories were considered to
be barren land, the existence of indigenous people like the Indians in North America, the Aborigines in
Australia, or the Maoris in New Zealand notwithstanding. But these territories were designated for
migration from Europe and, in fact, experienced a massive influx of European people. The migrants used
violence and their control of economic resources to seize power from the indigenous population. English
law was transplanted to these territories through migration. The first settlers brought the law with them. In
some cases, the applicability of English law remained in doubt or was disputed, and was only confirmed by
the English crown. For our purposes, however, the important point is that in the case of the so-called settled
territories, European law was not imposed on people accustomed to an entirely different legal order, but
was applied to people who were familiar with the basic principles of the colonial legal order.9 Therefore an
involuntary transplant is receptive if, because of the migration process, it exhibits familiarity with the
formal legal order. Otherwise, the involuntary transplant is unreceptive. There are 11 receptive, transplants
and 28 unreceptive transplants: 6 out of 11 of the receptive transplants are voluntary, and 14 of 28
unreceptive transplants are voluntary.
2.3
Direct vs. Indirect Transplants
A final distinction we use to classify transplants, is between transplants that received their formal
legal order directly and those that received if from another transplant. The former are called direct
transplants, the latter indirect transplants. Because the law - as we have argued - is a cognitive institution, it
is important to understand the context in which a rule originated and operates for making an informed
decision about its possible impact in the new domestic context. The development of a very flexible, or
enabling, corporate law in the United States that gives shareholders wide discretion in designing the internal
structure of the corporation, for example, can hardly be understood without appreciating the role of the
judiciary as an instance of last resort in defining the boundaries of this flexibility (Coffee 1989) . Countries
that do not offer shareholders recourse to the courts to a similar extent, tend to have a much more rigid
structure. Transplanting one element of the law (a flexible rule) without another (effective enforcement
institutions) is unlikely to produce the desired results.10
9
That these territories greatly benefited from the legal order they had brought with them was noted already
by Adam Smith (1976 book IV chapter 7). The contrast with Latin America, which had been colonized
earlier by imperial Spain, and where the Spanish elite was by far outnumbered by locals and Slaves was
indeed striking. Finer (1997 pp. 1394) notes that these different territories represented not only geographic
differences, but different historical periods.
10
Coffee (1996) is even skeptical about the possibility of extending shareholder suits in a legal system, such
as Germany, despite its effective legal institutions, without the body of case law that exists in the US, but is
absent in Germany.
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In order to have a better understanding of the functioning of a legal rule in the context of a legal
system, it is helpful to be closer to the legal system in which a rule originated. This facilitates access to
information about the interpretation and application of the law to real world cases. Countries that borrow
from another transplant are more remote from this information. The other transplant may have altered the
original law in the process of transplanting it. While this may have increased the receptivity of the law in the
first transplant, the second transplant now has neither access to the original rule nor necessarily understands
the reasons for its adaptation. Thus, it will be difficult to make an informed decision about the impact of this
rule on the receiving country's social and economic structure. Even if the rules remained unchanged, the
first transplant may still be in the process of giving meaning to the new rules by applying them to real world
cases. In this process, the meaning of the rule may change. No two cases are alike in a given legal order, and
cases that originate in different legal orders are likely to vary even more from one another. This will
undoubtedly lead to different results, even when identical rules are applied. Indirect transplants face the task
of trying to understand the original meaning of a rule by inferring from the application of this rule in a
context that differs from the one in which the rule originated, but also from their own context. This process
can be compared to translating a text from the original language to a second, and from this to a third
language. Even under the assumption that good translators are at work, the second translation is likely to
differ from one that was made directly from the original.
Another reason why indirect transplants may end up with a less effective legal system is that
transplanting becomes excessively easy. In particular, when countries share a common language, the
temptation to simply enact the laws of a neighboring country may be great, especially when the second
country lacks the resources for developing its own legal order independently. If initial conditions in the two
countries are similar, the indirect transplant may be just as successful (or unsuccessful) as the first
transplant. However, if initial conditions differ, the lack of adaptation decreases the receptivity of the
second transplant.
We have 26 direct transplants, and 13 indirect transplants. Italy, Spain, Portugal, the Netherlands,
Belgium, Greece and Egypt are all direct-French-family transplants. All English colonies received the
common law directly from England. This applies to "settled" as well as to "conquered" territories. Within
the German legal family, Japan received the formal legal order directly from Germany. The highest
concentration of indirect transplants in our sample can be found in Latin America. These countries were
first exposed to European law under Portuguese and Spanish rule. As noted earlier, these laws, however,
reflect a different stage of economic and legal development in Europe. The nineteenth century European
codes came to Latin America indirectly. The French origin was transplanted to Spain and Portugal. Both
countries first received this law when they were invaded by Napoleon. When they subsequently enacted
their own national codes, they copied the French codes almost word by word, but this time voluntarily. The
Spanish commercial code of 1829 served as a model for many Latin American countries. Some, including
Brazil, Colombia, and Peru, transplanted the foreign codes without major adaptations. Others, however,
made significant adaptations. Argentina used a variety of sources, including several transplants (Spain,
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Portugal, Brazil) and the French origin for its codification and made important changes in these rules. Chile
was less eclectic and relied primarily on Spanish and French law, but incorporated legal practice in Europe
since the beginning of the century. Thus, both Argentina and Chile were receptive-indirect transplants. Yet
others did not use the Spanish code, but a Latin American transplant as a model. This was the case in
Uruguay, Venezuela, and Ecuador. Uruguay chose the Argentine model, Venezuela the Chilean, and
Ecuador even used a third order transplant, the Venezuelan codes. These countries are all unreceptiveindirect transplants. There are also some indirect transplants in the German legal family. In particular,
Korea and Taiwan received the formal legal order from Japan - itself a transplant of German law - when
they came under Japanese colonial rule.
The two criteria we have used to classify transplants can be combined into four groups of
transplant countries: direct-receptive transplants, direct-unreceptive transplants, indirect-receptive
transplants, and indirect-unreceptive transplants. Table 4 groups our transplants into these categories, lists
the major period of legal transplantation, and gives some historical background information. A more
detailed summary of the coding is available upon request. Our argument implies that all of our transplants,
except the direct-receptive group, are subject to the transplant effect.
Tables 2a and 2b provide a useful comparison of the origin and transplant categories with the legal
families. As already noted, the legal families are excellent predictors of the quality of law on the books.
However, Table 2b shows that the origin and transplant categories have almost no ability to explain the
quality of law on the books: in 19 of the 22 possible binary comparisons, there is no statistically significant
difference between the different categories. While families are superior predictor of law on the books, in the
rest of the paper, we will show that the origin and transplant categories are a much stronger predictor of
legality.
2.3
A Simple Model
The mechanics of the transplant effect are formalized in the following model. Consider an
aggregate production function, that represents how a country converts inputs into GNP per capita. In order
to produce GNP, any country needs both legality and variable inputs. For simplicity, labor time, denoted W,
is the only variable input and the aggregate production function is:
(1)
Y = LαW1-α
In this specification, Y denotes GNP per capita (aggregate output), L denotes legality, W denotes labor
time, α (1-α) is output elasticity with respect to legality (labor).
We have argued that both informal legal order and the formal legal order determine legality in a
particular country. In order to formalize this idea, we posit a legality production function that requires
resources allocated to both the informal and formal legal order:
(2)
L = ( aF ζ +(1-a)I ζ ) 1/ ζ
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where I and F are resources allocated to the informal and formal legal order, ζ = ρ/(ρ – 1), where ρ ≥ 0 is
the elasticity of substitution between the informal and formal legal order, and a ε (0,1) measures F’s
productivity relative to L’s productivity. To ensure that resources are always allocated to I and F, we
assume that ρ ε [0, 1).11 Total legal resources are R = I + F, and θ = (F)/(I + F) = F/R denotes the share of
legal resources allocated to F. The legality production function can be re-written in terms of R and θ:
(3)
L = ( aθζ + (1-a)(1 – θ) ζ ) 1/ ζ R
In this specification, legality is strictly increasing in R and strictly concave in θ ε [0,1). Thus, for any R, the
share of resources allocated to F that maximizes legality is:
(4)
θmax = {1 + (1/a -1) ρ
–1 -1
}
There is a representative consumer that maximizes a one period utility function that is increasing
in consumption, C, and leisure. Labor supply is fixed and normalized at unity: leisure is 1 – W and
consumption is GNP net of legal resources: C = Y – R. Combining equations (1) and (3), consumption is a
function of work time, legal resources, and the share of legal resources allocated to formal legal order:
(5)
C ≡ C(W,R, θ) = ( aθ ζ + (1-a)(1 – θ) ζ ) α/ ζ R α W1-α - R
In countries that are not subject to the transplant effect, consumer demand determines the share of
resources allocated to the formal legal order (θ). In transplant effect countries, consumer demand for
formal legal order is constrained to be no greater than some θT < 1. The way in which transplant countries
receive the formal legal order affects the way that legal intermediaries such as the courts, the legal
profession and the government, can adapt it to match demand. If the formal legal order is transplanted in an
indirect and/or unreceptive fashion, legal intermediaries have trouble developing the modern order to match
demand years after transplantation. Legal intermediaries in indirect transplants have difficulties matching
demand because they work with a formal legal order that was received primarily from another transplant,
rather than from an origin. And, legal intermediaries in unreceptive transplants have difficulties because
they must work with a formal legal order that was not adapted and well suited to local conditions when it
was first received. In order to derive the demand for θ, we solve the representative consumer’s problem:
Choose (W, R, θ) ε [0,1] x [0, Y] x [0,1]:
(6.1)
Maximize U = Cβ (1 – W) 1-β ,
(6.2)
subject to θ ≤ θT ,
where the constraint in equation (6.2) is binding in transplant effect countries, and non-binding in
countries that are not subject to the transplant effect.
The elasticity of substitution parameters used in the output and legality production functions ensure
that, if an economy can produce positive output, then R* > 0, W* > 0 and θ* ε (0,1) in a feasible and
11
This is a sufficient but not necessary condition to ensure that both F and I are used. Much of the analysis
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optimal solution. Similarly, the Cobb-Douglas utility function ensures that in a feasible and optimal
solution, consumption and leisure are strictly positive: W* ε (0,1), and R* ε (0, Y).
It useful to represent the consumer’s problem in the Lagrangian form:
Choose (W, R, θ, λ) ε [0,1] x [0, Y] x [0,1] x R+ :
(7)
Maximize L =
Cβ (1 – W) 1-β + λ(θT - θ)
= [Y(L(R, θ),W) - R] β (1 – W) 1-β + λ(θT - θ)
where λ is the shadow price of θT: it measures the utility gain following a marginal increase in θT. The
first order conditions for a feasible and optimal solution can be expressed as:
(8.1)
δL/δW = β((1 – W)/C) 1-β (δY/δW) – (1-β)(C/1 – W) β = 0
(8.2)
δL/δR = δY/δR - 1 = 0
(8.3)
δL/δθ = β((1 – W)/C) 1-β (δY/δL)( δL/ δθ) – λ = 0
(8.4)
λ(δL/δλ) = λ(θT - θ) = 0
In solving this program, equations (8.1) and (8.2) can be combined to obtain explicit solutions for
W* and R*: W* = β, and R* = βΩ(a, ρ, θT, α), where Ω is continuous function of parameters
a, ρ, θT, α defined over the parameter space (0,1) x [0,1) x (0,1] x (0,1). Plugging these results into
equation (8.3) and (8.4) we can characterize the shadow price, λ. 12 When equation (8.4) is non-binding, λ =
0 and the solution to equation (8.3) is δL/ δθ = 0. If there is no constraint on the allocation of legal
resources between I and F, θ maximizes legality: θ* = θmax (see equation (4)). If θmax > θT, λ is
computed from equation (8.3). The next Proposition derives several important properties of λ.
Proposition 1. Suppose that θT < θ*. Then
1.
δλ/δθT
< 0;
2.
δλ/δa
> 0;
3.
2
δ λ/δaδρ < 0.
Proof. See the Appendix.
When formal legal order is constrained, the allocation of legal resources is inefficient: increasing
T
θ reduces this efficiency loss: it increases legality, which in turn increases GNP per capita, which then
increases welfare. The first point in Proposition 1 is that cost of an inefficient allocation falls as as θT
increases, and the allocation of legal resources between F and I approaches θ*. An implication of this result
is that a country that manages to relax the constraint on allocation of legal resources to the formal legal
order can reverse the transplant effect, and improve legality.
is robust to cases where ρ ≥ 1.
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William Davidson Institute Working Paper Number 308
Since historical evidence suggests that the parameter a has increased over time while ρ has fallen,
the second and third points have the striking implication that the impact of constraining the allocation of
legal resources to F on welfare, output and legality is exacerbated. The informal legal order, I, captures the
legal order that typically preceded the formalization of law and that relied on social sanctions, including
mutual monitoring, reputation effects, and trust. These mechanisms are effective in relatively small,
homogenous, groups (Kronman, 1985). The formal legal order, F, in contrast is a system of contracts,
codified regulations, and legal procedures that can be enforced even against parties without preexisting
relationships and in an environment with high information costs. Thus, with growing complexity of social
and economic relations, the productivity of F relative to I (as captured in the parameter a) increases. Point 2
says that as F becomes relatively more productive, constraining its development becomes more costly. It is
also the case that in less complex settings it is easier to substitute between the informal and formal legal
order. However, over time, the elasticity of substitution between I and F decreases: it becomes harder to
replace formal contracts and formal methods of dispute resolution with informal contracts that rely mainly
upon trust and reputation. Point 3 says that the increase in λ driven by the relative productivity gains in F
accelerates as it becomes more difficult to substitute between I and F. Integrating over λ(θ), the transplant
θ*
transplant effect = − ∫ T λ (θ )∂θ
θ
=
( )
U θ T − U (θ *)
effect is the total welfare loss:
The next proposition characterizes the transplant effect.
Proposition 2. Suppose that θT < θ*. Then the transplant effect is negative and:
1.
δ(transplant effect)/δθT > 0;
2.
δ(transplant effect)/δa < 0;
3.
δ2 (transplant effect)/δaδρ > 0.
Proof. These results follow trivially from Proposition 1.
Points 2 and 3 predict that there is a large difference in GNP per capita and legality between countries
that are and are not subject to the transplant effect.
3.
Legality and the Transplant Effect
12
The formal solution is in the Appendix.
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William Davidson Institute Working Paper Number 308
In this section we present tests of our hypothesis that the way in which the law is transplanted is a
more important determinant of legality than the supply of a particular family. The testable implications are
that origins and receptive-direct transplants are not subject to the transplant effect; receptive-indirect,
unreceptive-direct and unreceptive-indirect transplants are subject to the transplant effect; and, the
transplant effect has much greater impact on legality than the supply of a particular legal family. For ease of
presentation, all the analysis is conducted by means of single equation ordinary least squares (hereafter
OLS) techniques. System validation of our results will be provided separately in section four.
Table 5 reports regressions for each of the five legal proxies on transplant and legal family dummy
variables. In view of the significant multicollinearity between the five legal proxies, we introduce a
univariate ‘legality’ measure that is defined as the leading principle component of these legality proxies and
account for 83% of their overall (unconditional) variance. The English dummy variable and the origin
dummy variables are both normalized at zero. Thus, a coefficient on a transplant dummy estimates the
difference in legality between that transplant category and an average origin, and there is a ”transplant
effect” when a transplant dummy is negative. The coefficient for a legal family dummy estimates the
difference in legality between that family and an average English country.
The results in Table 5 for the five legality proxies and the legality variable support these
hypotheses. The coefficient for receptive-direct transplant is never statistically significant; thus, receptivedirect transplants are not significantly different than origins. The other three transplant groups seem to
suffer from a transplant effect: their coefficients are all significantly negative, and 15 of these 18
coefficients are significant at the 1-percent level.
To check that the transplant effect is more important than the supply of a particular legal family,
we perform several tests. First, we test the null hypothesis that joint impact of these legal families is
negligible (French = 0, German = 0, Scandinavian = 0). Because the p-value of these F-statistics always
exceeds .05, we do not reject the null. The F-test for receptive-indirect = 0, unreceptive-direct = 0,
unreceptive-indirect = 0 tests the null that these transplant effect groups jointly have a negligible impact on
legality and can be set to zero. Because the p-values are always less than .01, we reject this null even at the
1-percent level. Thus, the joint impact of the transplant effect is always significantly negative, while the
joint impact of families is negligible. In the three cells where the family effect is significant, the absolute
impact of families on legality is always lower than the absolute impact of any of the three transplants effect
groups. These results all support the hypothesis that the transplant effect has a stronger impact than the
supply of legal families on legality.
A striking pattern observed by inspection of the regressions for all five legal proxies is the
transplant effect coefficient is roughly uniform across the three transplant effect groups. Therefore the next
hypothesis we test is that for each legal proxy and for legality the coefficients of the three transplant effect
groups are equal. This hypothesis is tested individually for each of the six variables. Since the p-values for
these F-tests are never lower than .216, the null is not rejected, and the transplant effect appears to be
uniform across the three transplant effect groups.
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William Davidson Institute Working Paper Number 308
Table 6 reports our best estimate of a reduced form for the determinants of legality. Following the
results in Table 5, we exclude the receptive-direct coefficient, and combine the three transplant effect
countries into a transplant effect group. Since single equation specification searches can be notoriously
inefficient (neglecting important cross-equation information) and, thereby, produce a variety of ‘acceptable’
alternative specifications, we chose to report only OLS estimates for the specification that was ultimately
selected by the full system search implemented in section 5 (columns 2 and 4 in table 6; columns 1 and 3
supporting evidence for our final implementation of the legal family effects). Table 6 reports regression
equations that complement the reduced form equations in table 5 in a way that will be clarified further in
section 5. The first column reports regression results for legality on the transplant effect and the German
and Scandinavian families. While the transplant effect is significantly negative, the separate German and
Scandinavian variables are positive but insignificant (the p-values are .13 and .19). By inspection of the
point estimates and the standard errors, the German and Scandinavian variables have a roughly similar
impact on legality. The F test for the null hypothesis that the German effect equals the Scandinavian effect
supports this observation: it has a p-value of .9211 and allows us to combine the German and Scandinavian
families into one German&Scandinavian dummy variable.
The second column in Table 6 reports the best restricted reduced form for legality. Three points
are noteworthy. First, the fit is striking: the adjusted R2 of .6874 is higher than any of the reduced forms for
legality in Table 5. Second, this reduced form statistically encompasses the less restricted reduced form for
legality in Table 5. The F-test for the null hypothesis that these two specifications encompass each other has
a p-value of .7582, and cannot be rejected. Finally, this reduced form provides evidence that the transplant
effect is more important than the supply of any particular legal family. The transplant effect has a
coefficient of –6.603 and is significant at the 1-percent level; the German&Scandinavian coefficient has a
coefficient of 1.759 and is significant at the 10-percent level. To compare the impact of these two effects,
note that our legality measure ranges from 8.50 to 21.90 and has a standard deviation of 4.32. Thus, for a
transplant effect country in the English or French family, the impact of reversing the transplant effect would
be a one and a half standard deviation increase in legality. A reversal for a transplant effect country in the
German family would be a still impressive 1.1 standard deviation increase in legality.13
It is not possible to infer from our data, however, that picking a particular legal family would have
a significant impact on legality. Evidence in Table 5 suggests that legal families may be a spurious
explanatory variable. The relative impact of legal families is different for the five legal proxies, and this
implies that they are not statistically robust. Evidence provided by La Porta et al (1998, Table 6) shows that
the relative impact of the legal families on the legality proxies changes even after controlling for GNP per
capita. Legal families, by themselves, have very little power to explain the legality proxies: their share of
the variance in the five legality proxies is between 17.4% and 26.3% . Further evidence that legal families
are not statistically robust explanatory variables for legality is presented in Section 5.
13
There are no Scandinavian transplants, so we cannot say anything about this family’s impact.
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William Davidson Institute Working Paper Number 308
A criticism of our restricted reduced form is that it ignores the impact of economic development on
legality. Figure 1 suggests that once we control for log GNP per capita, the transplant effect would have no
explanatory power. In Table 7 we control for log GNP and check for the impact of the transplant effect and
legal families on legality.14 The transplant effect still is significant at the 1-percent level, and depresses
legality by more than half a standard deviation.
4.
Economic development, legal families and the transplant effect
An understanding of the relationship between the transplant effect, the supply of legal families and
economic development is critical for the design of legal reform. If there is a direct relationship between the
transplanting process and economic development, then there is reason to believe that a well designed legal
reform would have an immediate impact of GNP per capita. If, however, the transplant effect has primarily
an indirect impact through its impact on legality, then an effective legal reform can improve legality, which,
over time, will raise economic development. We have shown in section three that legal families have a
small, if not negligible, impact on legality. This implies that supplying a particular legal family has no
indirect impact on GNP per capita. However, if legal families had a direct impact on GNP per capita, then
policy makers could perhaps expect to get a direct and immediate gain in GNP per capita by picking the
best family.
The unrestricted reduced form for log GNP per capita in the last column of Table 5 provides a useful
overview of the impact of transplant effect and legal families on economic development. The test statistics
provide evidence that the receptive-direct transplant can be excluded; the legal families can be jointly
excluded; the three transplant effect dummy variables cannot be excluded; and, these three transplant effect
categories can be combined into a single transplant effect. The last column in Table 6 presents our best
restricted reduced form for Log GNP per capita: it includes a transplant effect and a French&German
dummy variable. Several test statistics provide intuition for its derivation. First, as shown in the third
column in Table 3, the F-test for the null that the German and French families have similar impact has a pvalue of .2745 and cannot be rejected. The F-test for the null that the best reduced form for legality
encompasses the less restricted reduced form in Table 5 is reported in the last column of Table 6: it has a pvalue of .6438, and cannot be rejected.
This reduced form for log GNP per capita in Table 6 supports our hypothesis that the transplant
effect is more important than supply of a particular legal family. The transplant effect and French&German
dummies are both significant at the 1-percent level. By inspection of the regression coefficients, the
absolute impact of the transplant effect is much stronger than the French&German effect. To see how this
works, consider the transplant effect country of Ecuador. It received the French law indirectly primarily
from the two transplant countries: Spain and Venezuela. And, even though Ecuador voluntarily received the
French law, it is an unreceptive transplant because it did not meaningfully adapt the law to its local
14
These regressions combine explanatory variable from the best restricted reduced form for both legality
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William Davidson Institute Working Paper Number 308
circumstances and there was no historical familiarity between Ecuador and France. If Ecuador had managed
to avoid or reverse the transplant effect, then its 1994 GNP per capita would have increased roughly tenfold to Ireland’s level ($13,000 U.S.). Legal families only marginally change the impact of the transplant
effect on economic development. For example, if Ecuador had received the German civil law without the
transplant effect, then its 1994 GNP would have been at Ireland’s level. However, if it had received the
English common law without the transplant effect, then its 1994 GNP per capita would have risen only to
roughly the level in Greece ($7390 U.S.). However, this marginal impact may be spurious. If we exclude
the families from the last regression in Table 6, the adjusted R2 falls only marginally from .5756 to .5484.
Furthermore, if we regress any combination of families on log GNP per capita and exclude the transplant
effect, the highest adjusted R2 that we obtain is an unimpressive .2115.
The first regression in Table 7 shows that the transplant effect on log GNP per capita is completely
indirect. The transplant effect coefficient in this regression is the direct effect, since it measures the
transplant effect after accounting for its impact via legality. The direct transplant effect coefficient is
statistically insignificant. Multiplying the legality coefficient in the second regression (.323) times the
transplant effect coefficient in the best restricted reduced form for legality in table 6 (-6.603), the
approximate indirect effect of transplant effect on log GNP per capita is – 2.13 (roughly 1.42 standard
deviations away from the mean log GNP per capita).
As already noted in the introduction, the policy implication of this result is fundamental. An
effective legal reform strategy should include measures that would avoid the transplant effect. Furthermore,
because the impact of the transplant effect on economic development is purely indirect, there is no reason to
believe that a legal reform would have a direct and immediate impact on GNP per capita. Finally, because
the transplant effect dominates the impact of legal families, and legal families may have a spurious impact
on economic development, our econometric results provide no support for the idea that picking the correct
family would lead to a direct and immediate gain in economic development
To check for robustness of the results in Tables 5, 6 and 7, we change Mexico from a unreceptiveindirect transplant to half a unreceptive-indirect and half a receptive-indirect transplant; we also change
Portugal and Spain from unreceptive-direct to half unreceptive-direct and half receptive-direct. While
Mexico copied the Spanish commercial code in an unreceptive fashion in 1854, twenty years later Mexico
promulgated a civil code using various sources and including lessons from legal practice, and subsequently
also revised the commercial code. While we usually use the date of the first reception, these two dates are
very close. Moreover, it is questionable whether the earlier code had a long-term impact, because it was
quickly superseded. Spain and Portugal are included in robustness test, because their proximity to France
and Germany could suggest that they were fairly familiar with the modern formal legal order that developed
and log GNP per capita.
15
More evidence is provided in Section 5.
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William Davidson Institute Working Paper Number 308
in these countries, even though they themselves did not directly participate in this development. All of our
results are robust to these modifications.
5.
Further statistical investigations
In sections 3 and 4, we defined legality as being the principal component of five out of six of our
initial measures of legal performance. It is critical to emphasize here the fact that a principal component is
defined as the linear combination of the initial variables, which has maximal variance, unconditionally on
any regressors. This is obviously not what we are interested in per se. Our primary interest lies instead in
analyzing the relationships between economic development, legality, the transplant effect and legal families.
While the use of a principal component for legality appears to have produced a truly interesting and easily
interpretable story, we have no guarantee at this stage of our analysis that it has not overly simplified or
even grossly distorted the underlying story.
The object of the present section is that of estimating and extensively testing a joint econometric
six equations model for our five measures of legal performance together with GNP per capita, conditional
on all other variables introduced earlier. Our objective is that of fully validating our use of a principal
component to represent legality. Since the parametric restrictions implied by this scenario are highly nonlinear cross-equation restrictions, we can no longer use single equation regression techniques as in section
4. Therefore, we shall now rely upon full information Maximum Likelihood (hereafter ML) estimation
techniques and Likelihood Ratio (hereafter LR) testing procedures. Furthermore, in view of our relatively
small sample size (49 countries), we shall use Monte Carlo (hereafter MC) simulation techniques to produce
finite samples standard deviations for all estimated parameters (including those of the principle components
themselves, which until now have been treated as given) and p-values for all test statistics. This section aims
at presenting the main steps of our statistical analysis in (relatively) non-technical terms. All technical
derivations are regrouped in an Appendix.
For the ease of notation we present our model with reference to a single arbitrary country. Let y
denote the vector comprising the five measures of legal performance retained for analysis and g the log of
GNP per capita. Let x regroup all relevant exogenous variables consisting of four transplant variables and
three legal families as in section 4. Each equation also includes a constant term capturing the reference
scenario (origin—English). We immediately eliminate these constant terms from the model by expressing
all variables in deviations from their sample means. This elimination implies that the intercepts are not
subjected to any of the restrictions, which are implemented below, in reflection of the fact that the five
measures of legal performance are not mean-standardized.
Our baseline (maintained hypothesis) model consists of six fully unrestricted reduced form
equations for y and g, conditionally on x. Actually such a model can be equivalently represented in the form
of five reduced form equations for y given x and of one unrestricted regression equation for g, given y and
x. This latter representation will prove to be particularly operational for the purpose of our analysis.
Therefore, let
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William Davidson Institute Working Paper Number 308
(9.1)
y = Π ′x + u
(9.2)
g = b′y + c′x + v , v ~ Ν (0, v 2 )
denote our baseline model, where
, u ~ Ν 5 (0, Ω)
Π ∈ ℜ 8 X 5 , Ω is a 5x5 symmetric Positive Definite Matrix,
b ∈ ℜ 5 , c ∈ ℜ 8 and v2 > 0; Np(m,V) denotes a p-dimensional Normal distribution with mean vector m
and covariance matrix V. Note that u and v are independent from one another by construction. For the ease
of comparison with results derived by La Porta et al. (1998) it is useful to present also the reverse
factorization of our baseline model, denoted as follows
(10.1)
y = δ g + Γ ′x + µ , µ ~ Ν 5 (0, D)
(10.2)
g = p ′x + ν
,ν ~ Ν (0, w 2 )
These two factorizations are observationally equivalent, merely corresponding to alternative oneto-one reparametrizations of the unrestricted reduced from of the model. Their respective parameters are
linked by the following identities.
(11)
 y   Π′ 
 ( Γ + δp ) ′ 
 x = 
 x
E  x  = 
′
′
g
(
c
b
)
p
+
Π



  
(12)
y   Ω
Ωb   ∆ + w 2 δ δ ′ w 2 δ 

 = 
V  x  = 
2
2
w 2 
 g   b′Ω v + b′Ωb   w δ ′
The parametric restrictions we will discuss in a moment are naturally related to factorization (9). The
implied restrictions on factorization (10) would be exceedingly tedious to derive analytically, but are trivial
numerically implement by means of the identities (11) and (12).
The very first step toward validating the use of a principal component consists of testing whether
or not the five components of y are actually proxies of a common univariate concept. The statistical
translation of this question corresponds to the following hypothesis.
Ha:
Note that
Π is of rank 1, that is to say that there exists β ∈ ℜ 5 and γ ∈ ℜ 8 such that Π = γβ ′.
β and γ are only defined up to a proportionality factor. To remove this ambiguity and identify
β and γ , we impose the condition that β ′β = 1. Under Ha we can reinterpret the equation system in
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William Davidson Institute Working Paper Number 308
(9.1) in the following observationally equivalent form: there exists a univariate latent variable
ξ (which is
obviously to be interpreted as legality) which is such that:
(13.1)
ξ = γ ′x + ε
(13.2)
y = βξ + η , η ~ Ν 5 (0, Σ)
which, by elimination of
, ε ~ Ν (0, σ 2 )
ξ produces the system (9.1) subject to Ha. The corresponding reinterpretation of
Ω is given by
Ω = Σ + σ 2 β β′
(14)
While
β is identified by assumption Ha, Σ and σ 2 are not identified in full, but Ω is.
An assumption which naturally complements Ha is that whereby only
ξ enters the GNP regression
equation (9.2), not all five y’s individually
Hb: b is proportional to
β.
If H a and Hb hold together we reach the conclusion that there indeed exists a univariate legality concept
ξ
which fully captures the interactions we wish to analyze. However, there is still nothing at this stage of the
discussion that tells us that the linear combination
β′y does coincide with the principal component of the y.
The missing link is provided by a third assumption that we formulate as follows:
H c:
This assumption whereby
Σβ = 0
Σ is singular, fully identifies Σ and σ2 in equation (14), since it now defines σ2 as
the eigenroot of Ω corresponding to the eigenvector β. More importantly, it also implies that the linear
combination
(15)
β ′η in equation (13.2) is identically equal to zero, which in turn implies that
ξ ≡ β′y
Thus, the fact that the linear combination
β ′y is legality not merely a proxy thereof.
Under Ha and Hc we can now explicitly relate
β to the principal component introduced earlier.
Under Ha, the unconditional covariance matrix of y can be written as
(16)
V = Ω + Π ′ΦΠ = Σ + (σ 2 + γ ′Φγ ).β β′
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William Davidson Institute Working Paper Number 308
where Φ denotes the covariance matrix of the x’s. Add Hc and we also have that
Vβ = (σ 2 + γ ′Φγ ).β
(17)
so that β is an eigenvector of V with eigenroot
σ 2 + γ ′Φγ. Let then qi (i = 2 5), all orthogonal to β, denote
the four remaining eigenvectors of V with corresponding eigenroots λi. Since
β′q i = 0 , we find that
Vq i = Σq i = λ i q i .
(18)
Therefore, it suffices that
λ i ≤ σ 2 + γ 1Φγ to produce the key result that β is the principal component of
the y’s under Ha and Hc. In view of the significant variability of the x’s which is represented by the
covariance matrix Φ, of the order of magnitude of the γ’s and of the relatively good fit of equations (13.1)
and (13.2), these inequalities are fully supported by the data which, in particular, immediately explains why
we will find that the ML estimation of β under assumption Ha and Hc virtually coincides with the principal
component of the y’s.
As detailed in Appendix, we can estimate the model (9) by ML under any combination of
assumptions Ha, Hb and Hc at the cost of introducing additional auxiliary reparameterizations that greatly
reduce the computational burden (to a numerical optimization in β in the worst case scenarios).
We note that while Ha and/or Hc can be tested on their own, Hb cannot since it remains tautological as long
as β is not defined elsewhere in the model. Therefore, we shall test Hb either in combination with Ha or on
its own with β being defined as the principal component of the y’s.
In Table 8 we report p-values for a full model specification search covering twenty different
submodels. In each box we report finite sample p-values for (up to) three LR test statistics under different
null hypotheses: the final model (G), the one to the right (H) and the one below (V). These p-values are
obtained by MC simulation: under the appropriate null hypothesis and keeping the x’s fixed, we generate
1,000 fictitious samples of size 49 for (y, g), evaluate the relevant LR test statistics and compute the fraction
of simulated test statistics which are larger than the one obtained for the actual sample. This presentation
enables one to visualize a full sequential search from the least restricted model (upper/left) down to the final
model (lower/right) along different paths. In any event, the p-value of our final model against the least
restricted one is an amazing 0.491. This is especially remarkable in view of the fact that, not counting
intercepts, the unrestricted model has 6 x 7 =42 coefficients in Π and ½(6 x 7) =21 coefficients in Σ for a
total of 63 coefficients. In contrast, our final model only has (4 + 1) + 1 +1 = 7 coefficients in (Π, b, c), 10
coefficients in Σ and 1 variance v2 for a grand total of 18 coefficients! In the words of Hendry and Richard
(1989), our final model parsimoniously encompasses the unrestricted one, in spite of excellent fit of the
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William Davidson Institute Working Paper Number 308
latter (no R2 is less than 0.65 in the reduced form and a remarkable 0.92 in the log GNP per capita
regression!).
Table 8 requires two additional comments. Firstly, the excellent fit of the models in row A do
explain why some of the lowest p –values are found in row A/Vertical. In particular, the fully unconstrained
OLS estimates of b in row A are generally fairly different from the estimates of β in rows B to D, but also
much less accurate (there is just too much multicollinearity between the five measures of legality to get
reliable estimates of their impact on GDP outside of a full system estimation). Secondly, and most
importantly, the transplant effect shows up totally unambiguously from column (1), which is why it is
immediately imposed from column (2) onward. In contrast, the role of legal families remains fairly
ambiguous across columns (2) and (5). There always remain very few borderline significant coefficients
here and there, not always the same from one specification to another. They do not tell a consistent story.
They are not robust and might actually be picking up an occasional outlier. The only clear message is that
the impact of legal families is always significantly smaller than that of transplant.
In view of the small sample size and of the fact that the restrictions imposed upon the model are
highly non-linear, all standard deviations for our system estimates we also obtained from the MC
simulations used for p-values. Table 9, which represents the system counterpart of Tables 6 and 7, reports
the estimates of the coefficients of interest of our final model together with (MC) standard deviations
(including for R2’s). The system results are quite similar to the OLS results in Tables 6 and 7. They are
somewhat more accurate, in spite of the fact that the β’s are no longer treated as given, because the system
estimates take full advantage of all the cross-equation restrictions that are built into our final model. This
similarity in results suggests that further investigations, e.g. under an extended data set sometime in the
future, could usefully rely upon single equation least squares methods, using principal components for
legality, though, most importantly, the full validation of such results does require system analysis
(notwithstanding the fact that a system search such as the one summarized by Table 8 is far more
informative than single equation searches. The final model estimated in Tables 6 and 7 and reestimated in
Table 9 if the outcome of a full system search).
Finally, MC simulation enables us to cope with an additional problem which has not been
mentioned anywhere until now, and results from the fact that the five legal variables are truncated at 1
(about 11% of the sample!). Though the legality aggregate
β′y is not as severely truncated—another good
reason for using it—this finding begs the question of whether or not truncation might have (severely) biased
our analysis. Several MC simulation runs under truncated distributions for the y’s unambiguously indicate
that this is not the case (fortunately because it really isn’t feasible to estimate a five-dimensional truncated
distribution from 49 data points!). Coefficient estimates are mildly biased especially in the legality reduced
form equations, as to be expected, with no bias exceeding 10%. Similarly, some standard deviations are
slightly upward biased. Most importantly, truncation has very little impact on the p-values reported in Table
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William Davidson Institute Working Paper Number 308
9 and leaves all our key results fundamentally unaffected. (Variations of less than 10% in coefficient values
are completely irrelevant in the context of our analysis.)
All together, we find that the full system analysis described in this section has brought unambiguously
strong support to the conclusions reached earlier.
5.
Conclusions
We have shown that the way in which the law was initially transplanted is a more important
determinant of legality than the supply of a particular legal family. Furthermore, the legal transplantation
process has a large, albeit indirect, effect on economic development via its impact on legality. The policy
implications of these findings have been discussed throughout the text, and will not be repeated here. What
is important to note is that there are several open questions remaining. First, we have conducted our analysis
using a sample of 49 countries. It is now critical to broaden the data set and check for the robustness of the
transplant effect as well as the impact of legal families. As noted in section 5, we could employ our
statistical techniques even if the data for the five legal proxies is incomplete. Secondly, as noted in the
introduction, our model under-predicts the legality performance of transplant effect countries including
Hong Kong, Taiwan, Singapore, Spain, and Portugal. Understanding just how these countries managed to
reverse the transplant effect might provide lessons for the design of legal reform and is an area for future
research.
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Figure 1: Economic Development and Legality
12
10
Log GNP Per Capita
8
6
4
2
0
1
1.5
2
2.5
Log Legality
32
3
3.5
William Davidson Institute Working Paper Number 308
Box 1
Definitions of Terms and Concepts
Legal Family
Origin
Transplant
Direct transplant
Indirect transplant
Voluntary transplant
Involuntary transplant
Transplant with adaptation
Transplant with familiarity
Receptive transplant
Unreceptive transplant
Formal legal systems the major features of which can be traced to a common
source. The four major legal families in the world that are commonly
distinguished are the English common law, the French, the German, and the
Scandinavian legal families.
Country that developed its formal legal system internally.
Country that received major features of its legal system from another country.
Country that received its formal legal system from an origin country.
Country that received its formal legal system from another transplant.
Country that made an active decision to copy the formal legal system of
another country.
Country on which the formal legal system of another country was imposed.
A transplant that introduces changes into the law to take account of local
conditions, including preexisting law.
A transplant with a significant share of the population that is familiar with the
transplanted legal concepts as a result of a shared history or sizeable
immigrant population.
A transplant with adaptation and/or familiarity.
A transplant without adaptation and/or familiarity.
William Davidson Institute Working Paper Number 308
Table 1: Origins
Country
Austria
Denmark
Finland
France
Germany
Norway
Sweden
Switzerland
United Kingdom
United States
Legal formation period Formal law source
1811-1862
Austria enacts a comprehensive civil code in 1811.
It is an idiosyncratic codification based on the
Roman/Germanic tradition. The 1862 general
German commercial code reflects existing business
practice as well as French influence.
1815-1905
Early codification of customary law. Series of
statutory enactments during the 19th century. Legal
borrowing is limited primarily to other Scandinavian
countries.
1809-1917
Legal development throughout 19th century slowed
down due to annexation by Russia. After declaration
of independence in 1917 legal reforms based
primarily on Scandinavian models.
1804-1811
Promulgation of the five Napoleonic Codes,
including the Code civil, the Code of Civil
Procedure, the Code of Commerce, the Code of
Criminal Procedure, and the Penal Code. Codes
consolidate legislation enacted prior to the
revolution and codify business practice.
1862-1900
Extensive codification after unification in 1871.
Most influential is the 1896 civil code based on
Roman legal principles with some references to
Germanic law. Earlier enactment of commercial
code (1862) codifies existing business practice.
1814-1915
Until 1814 part of Denmark. Statutory enactments
during the 19th century based draw on common legal
heritage and enactments in neighboring
Scandinavian countries.
1734-1905
Codification of customary law in 1734 (some
Roman and canon law influences). In the 19th
century parts of the code are replaced with new
statutes.
1881-1907
Codification of commercial and civil law. In
comparison to Germany less influence of Roman
law. Codification of Swiss business practice, with
some borrowing from French and Austrian laws that
had earlier been enacted in parts of the country
1485-1832
The development of English common law begins
with the Norman conquest in 1066. Local customary
law completely replaced since mid 15th century.
Increasing importance of statutory law since the 19th
century, but case law continues to dominate.
1774-1820
In 1774, the first continental congress passes
resolution that Americans are entitled to the
common law and statutes that existed at the time of
English colonization. Since independence
development of a body of formal law that is
independent of the legal system that is operating in
England.
1
Legal family
German
Scandinavian
Scandinavian
French
German
Scandinavian
Scandinavian
German
English
English
William Davidson Institute Working Paper Number 308
Table 2a
Law on the Books
Categorical Means for Legal Families
(Standard Deviations in Parentheses)
Observationsa
18/19
Category
English
French
21/19
German
6/6
Scandinavian
4/4
Sample Average
Shareholder Rights
4.00
(.970)
2.33
(1.197)
2.33
(1.033)
3.00
(.816)
3.00
(1.307)
49/47
Creditor Rights
3.11
(1.231)
1.58
(1.346)
2.33
(.816)
2.00
(.816)
2.30
(1.366)
Differences in Means
(P-values for the hypothesis that these differences equal zero are in parentheses)b
English-French
1.67
(.000)*
1.67
(.008)*
1.00
(.085)***
0.00
(1.000)
-.67
(.220)
-.67
(.291)
English-German
English-Scandinavian
French-German
French-Scandinavian
German-Scandinavian
a
Shareholder rights are on the left-hand side; creditor rights are on the right-hand side.
A two-sided two-sample t test with unequal variances is performed.
*Significant at the 1 percent level.
**Significant at the 5 percent level.
*** Significant at the 10 percent level.
b
2
1.53
(.001)*
.78
(.101)***
1.11
(.065)***
-.75
(.119)
-.42
(.438)
.33
(.548)
William Davidson Institute Working Paper Number 308
Table 2b
Law on the Books
Categorical Means for Origins and Transplants
(Standard Deviations in Parentheses)
Category
Origin
Transplant
Observations*
10/10
39/37
Transplant Types:
Receptive—
Direct
Receptive—
Indirect
Unreceptive—
Direct
Unreceptive—
Indirect
11/10
Sample Average
49/47
9/9
2/2
17/16
Shareholder Rights
3.00
(1.333)
3.00
(1.318)
Creditor Rights
2.00
(1.247)
2.38
(1.401)
3.00
(1.658)
4.5
(.707)
3.29
(1.263)
2.27
(.786)
3.00
(1.307)
2.13
(1.000)
1.50
(.707)
3.19
(1.109)
1.60
(1.647)
2.30
(1.366)
Differences in Means
(P-values for the hypothesis that these differences equal zero are in parentheses)b
0.00
Origin-Transplant
(1.000)
0.00
Origin-(Receptive-Direct)
(1.000)
-1.50
Origin-(Receptive-Indirect)
(.1128)
-.29
Origin-(Unreceptive-Direct)
(.579)
.73
Origin-(Unreceptive-Indirect)
(.155)
-1.50
(Receptive-Direct)-(Receptive-Indirect)
(.112)
-0.29
(Receptive-Direct)-(Unreceptive-Direct)
(.649)
0.73
(Receptive-Direct)-(Unreceptive-Indirect)
(.252)
1.21
(Receptive-Indirect)-(Unreceptive-Direct)
(.184)
2.23
(Receptive-Indirect)-(Unreceptive-Indirect)
(.090)***
1.02*
(Unreceptive-Direct)-(Unreceptive-Indirect)
(0.014)
a
Shareholder rights are on the left-hand side; creditor rights are on the right-hand side.
A two-sided two-sample t test with unequal variances is performed.
*Significant at the 1 percent level.
**Significant at the 5 percent level.
***Significant at the 10 percent level.
b
3
-.38
(.420)
0.000
(1.000)
.50
(.499)
-1.19
(0.024)**
.40
(.549)
.50
(.492)
-1.19
(.013)*
0.40
(.527)
-1.69
(.119)
-.10
(.897)
1.59
(.018)**
William Davidson Institute Working Paper Number 308
Table 3: Receptive and Unreceptive Transplants
Country
Transplanting
Period
Australia
Belgium
Canada
Ireland
Israel
Italy
Japan
Netherlands
New Zealand
Argentina
Chile
Brazil
Colombia
Ecuador
Egypt
Greece
Hong Kong
India
Indonesia
Jordan
Kenya
Malaysia
Mexico
Nigeria
Pakistan
Peru
Philippines
Portugal
Singapore
South Africa
South Korea
Spain
Sri Lanka
Taiwan
Thailand
Turkey
Uruguay
Venezuela
Zimbabwe
1808-1873
1810-1887
1810-1830
1769-1801
1858-1945
1805-1870
1868-1899
1810-1838
1840-1900
1862-1880
1854-1880
1808-1865
1821-1853
1831-1881
1798-1840
1821-1878
1844-1898
1858-1888
1815-1870
1850-1918
1895-1918
1867-1937
1821-1889
1863-1915
1858-1888
1811-1853
1889-1898
1808-1867
1858-1895
1815-1865
1912-1945
1808-1829
1796-1861
1895-1945
1908-1935
1850-1927
1878-1900
1811-1873
1888-1923
Initial Transmission and Receptivity of Law
Transmission
Voluntary
0
1
0
0
0
1
1
1
0
1
1
1
1
1
1
1
0
0
0
1
0
0
1
0
0
1
0
1
0
0
0
1
0
0
1
1
1
1
0
Involuntary
1
0
1
1
1
0
0
0
1
0
0
0
0
0
0
0
1
1
1
0
1
1
0
1
1
0
1
0
1
1
1
0
1
1
0
0
0
0
1
4
Receptivity
Adaptation
0
0
0
0
1
1
1
1
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Familiarity
1
1
1
1
0
1
0
1
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Transplant
Type
receptive
receptive
receptive
receptive
receptive
receptive
receptive
receptive
receptive
receptive
receptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
unreceptive
William Davidson Institute Working Paper Number 308
Table 4: Transplants
Country
Transplanting
period
Country/countries that transplant the Law
Legal family
Receptive-direct transplants
Australia
1808-1873
Belgium
1810-1887
Canada
1810-1830
Ireland
1769-1801
Israel
1858-1945
Italy
1805-1870
Japan
1868-1899
Netherlands
1810-1838
New Zealand
1840-1900
16
English common law (origin) is the main source of law.
Australia was considered a “settled colony”, where the
settlers took the law of England with them. Major
migration by free settlers from England in early 19th
century.
French law (origin) is the main source of law.
French law is introduced in 1810 during Napoleonic
wars. Independence of low countries in 1815, but codes
remain in place. Independent Belgium (since 1830)
enacts national codification based on French model.
English common law (origin) is the main source of law.
Trading companies and settlers from England and the
United States import English law.
English common law (origin) is the main source of law.
English law was introduced in Ireland after the Norman
conquest. By the mid 17the century it had replaced the
native Irish law.
English common law (origin) is the main source of law.
Modern codes based on French model introduced in the
Ottoman empire in second half of 19th century. Since
1922 British mandate; migration from Europe. Ottoman
law still binding, but basic principles of English
common law (excluding statutory law) introduced.
French law (origin) is main source of law. French rule
since 1796; in 1805 Napoleon becomes King of Italy
and introduces French codes. National codification only
after Italy is unified, but individual states enact codes
based on French law.
German law (origin) is main source of law. Under
foreign pressure, the Meji restoration launches the
formalization of the Japanese legal system based on
foreign models. Earlier drafts of the commercial code
are based on French law. For the final versions of the
civil and commercial law, German law is most
influential.
French law (origin) is the main source of law. French
codes are introduced in 1810 during annexation by
France. After 1815 the laws remain in force on a
preliminary basis and are replaced in 1838 by Dutch
codification based on French law.
English common law (origin) is the main source of law.
In 1840 Britain officially takes possession of the
country. Legal transplant through migration.
La Porta et al. (1998) code Israel as belonging to the English common law family.
5
English
French
English
English
French/English16
French
German
French
English
William Davidson Institute Working Paper Number 308
Table 4: Transplants (continued)
Receptive-indirect Transplants
Argentina
1862-1880
Chile
1854-1880
Spanish, Portuguese, Brazilian, Dutch (transplants) and French
French law (origin) are important sources of law.
Argentina asserts autonomy in 1810 and declares
independence in 1816. 1862 extensive legal reforms,
including the enactment of civil, commercial, civil
procedure laws.
French
Spanish (transplant), French (origin) law and legal
practice are major sources of the law. Independence
from Spanish rule in 1811. Legal reforms in the second
half of the 19th century, including the enactment of a
commercial code in 1854.
Unreceptive-direct transplants
Egypt
1798-1840
Greece
1821-1878
Hong Kong
1844-1898
India
1858-1888
Jordan
1850-1918
Kenya
1895-1918
French law (origin) is main source of law. Under
French occupation from 1796-1807 courts are
established, but legal reform remains incomplete.
During the 19th century French law is applied to cases
involving foreign parties. Textbooks and translations of
French law into Arabic serve as primarily sources of
this law.
French law (origin) is main source of law. After
independence, Byzantine law is introduced in 1821.
Translations of French codes in the 19th century
influences commercial law. Statutory enactments during
19th century draw primarily on French, but also on
German and Austrian law.
English common law (origin) is main source of law.
Ordinance of 1844 declares law of England applicable
to colony except where local circumstances render this
inappropriate.
English common law (origin) is the main source of law.
Establishment of British Raj in 1858. Jurisdiction of
English law over local population gradually expanded.
In 1862 all existing courts in India are replaced with
English courts.
French law (origin) is main source of law. As part of
the Ottoman empire, Jordan received French law in the
mid 19th century.
English common law (origin) is main source of law.
Since 1895 British protectorate. The laws in force in
England at that date are made applicable in the colony,
and codifications of common law that were earlier used
in India are introduced.
6
French
French
French
English
French
English
William Davidson Institute Working Paper Number 308
Table 4: Transplants (continued)
Unreceptive-direct transplants
Malaysia
1867-1937
Nigeria
1863-1915
Pakistan
1858-1888
Portugal
1808-1867
Singapore
1858-1895
South Africa
1815 -1865
Spain
1808-1829
Sri Lanka
1796-1861
Thailand
1908-1935
English common law (origin) is main source of law. in
1867, London‘s colonial office assumes direct control
over “Straits Settlements”. English law applied
primarily to criminal and commercial (not family,
inheritance) matters.
English common law (origin) is main source of law.
Cession of Lagos in 1863 and establishment of British
rule. Courts with jurisdiction over British subjects
established. Codified common law introduced,
including 1912 companies ordinance.
English common law (origin) is main source of law.
Establishment of British Raj (including India, Pakistan,
and Bangladesh). See comments for India.
French law (origin) is main source of law. First
introduction of the French codes in 1808 during the
Napoleonic invasion. New civil code promulgated in
1867, new Commercial Code in 1888.
English common law (origin) is main source of law. In
1819 Singapore is founded as part of the Strait
Settlements. English law applies to settlers and local
population in criminal and commercial matters.
England (origin) and Roman-Dutch common law are
the main sources of law. British takeover of former
Dutch colony in 1815. English law applied to court
organization, judicial procedure, and administration.
French law (origin) is main source of law. Introduction
of the French codes in 1808 during the Napoleonic
invasion. New civil code based on French model
introduced in 1829; law on joint stock companies in
1848, and a revised code of civil procedure in 1881.
English common law (origin) is the main source of law.
British take over former Dutch colony. Roman-Dutch
law continues to apply, but the establishment of
common law courts after 1801 fosters the development
of English common law.
French law (origin) is main source of law. Only country
in SE Asia that escaped colonization. Set of codes
produced under King Chulalongkorn with the help of
French and Belgian advisors.
17
English
English
English
French
English
English17
French
English
French (English ?)18
Because of the influence of Roman-Dutch law, South Africa is sometimes classified as a mixed jurisdiction. In
mixed jurisdictions, common law was introduced after earlier transplants had established a civil law systems. Other
mixed jurisdictions include Israel, the Philippines, and Sri Lanka.
18
Note that La Porta et al. (1998) code Thailand as belonging to the English legal family.
7
William Davidson Institute Working Paper Number 308
Table 4: Transplants (continued)
Unreceptive-direct transplants
Turkey
1850-1927
Zimbabwe
1888-1923
French (origin) and subsequently Swiss law (origin) are French/German19
the main sources of law. The Ottoman empire
introduces legislation based on French law in mid 19th
century. Under Kemal Atatürk Turkey copies Swiss
codes.
English common law (origin) is main source of law. In English
1888 charter issued by and English law made
applicable by decree.
Unreceptive-indirect transplants
Brazil
1808-1865
Colombia
1821-1853
Ecuador
1831-1881
Indonesia
1815-1870
Mexico
1821-1889
Peru
1811–1853
Philippines
1889-1898
19
Spanish (transplant) and French (origin) law are main
sources of law. 1822 Brazil achieves independence
from Portugal. Imperial Portuguese law remains in
force. Legal modernization in mid 19th century.
Spanish law (transplant) is main source of law. Major
codification enacted in mid 19th century based on
Spanish models of 1829. Subsequent revisions based on
Chilean law.
Spanish (transplant) and Venezuelan l(transplant) laws
are main sources of law. Since 1830 independent state.
In 1831, the Spanish code is made directly applicable in
Ecuador. The 1882 commercial code is based on the
Venezuelan codification. Procedural law governed by
Spanish law.
Dutch law (transplant) is main source of law. Local
(adat) law applies to indigenous population. Dutch law
governs colonial population.
Spanish (transplant) and French (origin) law are main
sources of the law. Spanish imperial laws remain in
force until replaced by new codifications. 1854
commercial code based on Spanish and French models;
1889 revision also incorporates elements of Italian law.
Civil procedure modeled on Spanish law. 1870
comprehensive civil code based on various models.
Spanish law (transplant) is main source of law. Legal
reforms in mid 19th century copy Spanish codes of
1829.
Spanish law (transplant) is main source of law. Spanish
colony since 1565. Codifications in the late 19
hundreds are based Spanish codes of 1829.
Amendments and introduction of new procedural rules
when sovereignty over the Philippines is transferred to
the US in 1898, but character of legal system remains
unchanged.
LLSV 1998 code Turkey as French, because of the Ottoman heritage.
8
French
French
French
French
French
French
French
William Davidson Institute Working Paper Number 308
Table 4: Transplants (continued)
Unreceptive-indirect transplants
Japanese law (transplant) is main source of law. Korea German
is colonized by Japan in 1912 and Japanese codes of the
Meji restoration are enacted.
Taiwan
1895-1945
Japanese law (transplant) is main source of law. The
German
island of Taiwan becomes Japanese colony and
Japanese codes of the Meji restoration are introduced.
Uruguay
1878-1900
The law of Argentina (transplant) is main source of law. French
Modernization of legal system since 1865; codes are
based on Argentinean and Bolivian law models.
French
Venezuela
1811-1873
Chilean law (transplant) is main source of law.
Venezuela becomes independent in 1811. Spanish
imperial laws remain in force. In 1862 civil and
commercial codes enacted based on Chilean model.
Sources: Baum and Takahashi (2000); Castles (1982); David (1985); Glendon, Gordon, and Osakwe (1994); Hahm
(1996); Hooker (1978); Hooker (1988); (Knapp (1972) (various country reports); Katz (1986); Means (1980);
Merryman, Clark, and Haley (1994); Mommsen and Moor (1992); Oda (1999); Pistor and Wellons (1999);Wang
(1997)Yadin (1962); Zweigert and Kötz (1998).
South Korea
1912-1945
9
Independent
Variables
Receptive—
Direct
Receptive—
Indirect
Unreceptive—
Direct
Unreceptive—
Indirect
French
German
Scandinavian
Intercept
Adjusted R2
F Test:
French = 0,
German = 0,
Scandinavian = 0
Probability > F
F Test:
Receptive-Indirect=0,
Unreceptive-Direct=0,
Unreceptive-Indirect=0
Probability > F
F Test:
Receptive-Indirect=
Unreceptive-Direct=
Unreceptive-Indirect=
Transplant effect
Probability > F
William Davidson Institute Working Paper Number 308
Table 5
Ordinary Least Square Regressions
Determinants of Legality and Economic Development
Dependent Variables
Efficiency of
Risk of
Risk of Contract
Judiciary System
Rule of Law
Corruption Expropriation
Repudiation
.054
-0.70
-0.43
.019
.086
(.7953)
(1.0007)
(.8093)
(.5581)
(.6413)
-2.078***
-3.012***
-2.966**
-2.766*
-2.970*
(1.2407)
(1.5612)
(1.2625)
(.8706)
(1.0004)
-2.440*
-3.403*
-2.820*
-2.209*
-2.187*
(.7616)
(.9580)
(.7748)
(.5343)
(.6139)
-2.941*
-4.382*
-3.950*
-2.600*
-2.553*
(.7916)
(.9961)
(.8055)
(.5555)
(.6383)
-.926***
.633
-.173
.213
.105
(.5410)
(.6807)
(.5505)
(.3796)
(.4362)
-.116
1.589
.553
1.051***
1.582**
(.7793)
(.9805)
(.7930)
(.5468)
(.6284)
.371
1.437
1.201
.398
.718
(1.0117)
(1.2730)
(1.0295)
(.7100)
(.8158)
9.629*
8.563*
8.800*
9.257*
8.720*
(.7234)
(.9103)
(.7361)
(.5076)
(.5833)
.5242
.5417
.6049
.6092
.5919
Legality
-.002
(1.3949)
-6.132*
(2.1761)
-5.918*
(1.3354)
-7.518*
(1.3354)
.056
(.9488)
2.144
(1.3668)
1.993
(1.7744)
19.584*
(1.2688)
.6702
Log GNP
Per Capita
.099
(.5572)
-1.467***
(.8692)
-2.046*
(.5334)
-2.282*
(.5546)
.541
(.3790)
1.207**
(.5460)
.687
(.7088)
9.399*
(.5068)
.5601
1.25
.97
.67
1.28
2.40
1.08
1.72
.3044
.4153
.5782
.2937
.0818
.3685
.1770
4.99
6.78
8.13
8.13
6.12
10.22
6.57
.0048
.0008
.0002
.0002
.0015
.0000
.0010
.49
.98
1.59
.48
.48
1.07
.60
.6186
.3850
.2164
.6216
.6207
.3520
.5559
NOTE: Standard errors are reported in the parentheses. The origin dummy and English dummy variables are normalized at zero.
*Significant at the 1 percent level. **Significant at the 5 percent level. *** Significant at the 10 percent level.
10
William Davidson Institute Working Paper Number 308
Table 6 Reduced Form for Legality and Economic Development
Explanatory Variables
Transplant effect
Legality
-6.589*
(.8038)
French
German
Scandinavian
1.702
(1.1146)
1.862
(1.4060)
Dependent Variables
Log of GNP Per Capita
-6.603*
-2.284*
-2.388*
(.7838)
(.3060)
(.2918)
.435
(.3110)
.958**
(.4501)
French & German
.572*
(.2537)
German & Scandinavian
Intercept
Adjusted R2
F Test:
French = German
Probability > F
F Test:
German = Scandinavian
Probability > F
F Test: Against
Specification in Table 5
Probability > F
1.759***
(.9476)
19.725*
(.6829)
.6874
19.716*
(.6971)
.6805
9.665*
(.2574)
.5776
9.717*
(.12537)
.5756
1.22
.2745
.01
.9211
.52
.7582
.68
.6438
Table 7: Regressions for Legality and Economic Development
Transplant effect
French & German
German & Scandinavian
Legality
Log of GNP Per Capita
Intercept
Adjusted R2
Dependent Variables
Log of GNP Per Capita
-.077
-1.970*
(.2893)
(.6706)
.657*
.651*
-1.519*
(.1664)
(.1598)
(.4337)
-.020
.654
(.2302)
(.5746)
.323*
.329*
(.0342)
(.0186)
2.074*
(.2191)
3.072*
2.926*
.175
(.6994)
(.3365)
(2.1243)
.8610
.8668
.8934
Legality
-2.087*
(.6649)
-1.473*
(.4333)
2.129*
(.2144)
-.118
(2.1155)
.8927
Note: Standard errors are reported in the parentheses. A Transplant effect includes receptive—direct transplants and
both unreceptive transplants.
*Significant at the 1 percent level.
**Significant at the 5 percent level.
*** Significant at the 10 percent level
11
William Davidson Institute Working Paper Number 308
Table 8: Model specification search; p-values
(1)
(2)
(3)
(4)
(5)
(A)
G: 0.491
V: 0.054
H: 0.824
G: 0.201
V: 0.106
H: 0.868
G: 0.112
V:0.122
H: 0.211
G: 0.146
V:0.123
H: 0.296
G: 0.157
V:0.120
(B)
G: 0.766
V:0.443
H: 0.941
G: 0.354
V:0.097
H: 0.983
G: 0.200
V:0.098
H: 0.213
G: 0.306
V:0.142
H: 0.294
G: 0.339
V:0.200
(C)
G: 0.927
V:0.614
H: 0.711
G: 0.880
V:0.442
H: 0.983
G: 0.641
V:0.438
H: 0.286
G: 0.672
V:0.557
H: 0.726
G: 0.565
V:0.565
G: 0.917
V:0.579
G: 0.987
V:0.980
G: 0.796
V:0.540
G: 0.896
V:0.896
Final
Model
(D)
p – values
G: against final model (lower/right corner);
Rows:
V:
against model immediately below:
H:
against model immediately to the right;
rank restrictions;
A:
No rank restrictions;
B:
No rank restrictions; b′ y in (9.2) proportional to principal component;
C:
Ha and Hb;
D:
Ha, Hb and Hc
Columns: exclusion restrictions
1:
All x’s in (9.1) and (9.2):
2:
French, German, Scandinavian, transplant effect in (9.1) and (9.2);
3:
same for (9.1); only French + German in (9.2);
4:
same for (9.2); German, Scandinavian, transplant effect in (9.1);
5:
same for (9.2); German + Scandinavian, transplant effect in (9.1);
12
William Davidson Institute Working Paper Number 308
Table 9: Full Information Results
`
Reduced Form
Part 1
Regressions
Legality
lngnp/cap
Legality
lngnp/cap
Transplant
-6.617
(0.763)
-2.176
(0.281)
-2.158
(0.530)
---
French + German
---
0.6636
(0.1524)
-1.360
(0.333)
0.6636
(0.1524)
German + Scan.
1.742
(0.928)
0.5729
(0.3080)
0.5691
(0.3365)
---
Legality
---
---
---
0.8786
(0.0301)
---
---
2.052
(0.205)
---
Intercept
19.73
(0.69)
9.423
(0.251)
0.4023
(1.935)
2.934
(0.338)
R2
0.7151
(0.0572)
0.6259
(0.0580)
0.9091
(0.0193)
0.8986
(0.0301)
Engrp/cap
Note: Columns (1) and (4) are directly estimated. Columns (2) and (3) are derived from identities (11) and (12).
Part 2
Beta Coefficients
Efficiency of Legal
System
Rule of Law
Corruption
Risk of
Expropriation
Risk of Contract
Repudiation
0.3766
(0.0431)
0.5735
(0.0287)
0.5037
(0.0252)
0.3682
(0.0183)
0.3874
(0.0232)
13
William Davidson Institute Working Paper Number 308
Appendix Table 1: Legality and Economic Development
GNP Per
Risk of
Capita
Legality*
(U.S. $)
Country
Corruption
Contract
Repudiation
Australia
10.00
10.00
8.52
9.27
8.71
20.44
17500
Canada
9.25
10.00
10.00
9.67
8.96
21.13
19970
Hong Kong
10.00
8.22
8.52
8.29
8.82
19.11
18060
India
8.00
4.17
4.58
7.75
6.11
12.80
300
Ireland
8.75
7.80
8.52
9.67
8.96
18.92
13000
Israel
10.00
4.82
8.33
8.25
7.54
16.54
13920
Kenya
5.75
5.42
4.82
5.98
5.66
12.00
270
Malaysia
9.00
6.78
7.38
7.95
7.43
16.67
3140
New Zealand
10.00
10.00
10.00
9.69
9.29
21.55
12600
Nigeria
7.25
2.73
3.03
5.33
4.36
9.39
300
Pakistan
5.00
3.03
2.98
5.62
4.87
8.98
430
Singapore
10.00
8.57
8.22
9.30
8.86
19.53
19850
South Africa
6.00
4.42
8.92
6.88
7.27
14.51
2980
Sri Lanka
7.00
1.90
5.00
6.05
5.25
10.40
600
Thailand
3.25
6.25
5.18
7.42
7.57
12.94
2110
United Kingdom
10.00
8.57
9.10
9.71
9.63
20.41
18060
United States
10.00
10.00
8.63
9.98
9.00
20.85
24740
Zimbabwe
7.50
3.68
5.42
5.61
5.04
11.59
520
Argentina
6.00
5.35
6.02
5.91
4.91
12.34
7220
Belgium
9.50
10.00
8.82
9.63
9.48
20.82
21650
Brazil
5.75
6.32
6.32
7.62
6.30
14.09
2930
Chile
7.25
7.02
5.30
7.50
6.80
14.70
3170
Colombia
7.25
2.08
5.00
6.95
7.01
11.58
1400
Ecuador
6.25
6.67
5.18
6.57
5.18
13.11
1200
Egypt
6.50
4.17
3.87
6.30
6.05
11.34
660
France
8.00
8.98
9.05
9.65
9.19
19.67
22490
Greece
7.00
6.18
7.27
7.12
6.62
14.91
7390
Indonesia
2.50
3.98
2.15
7.16
6.09
9.16
740
Italy
6.75
8.33
6.13
9.35
9.17
17.23
19840
Jordan
8.66
4.35
5.48
6.07
4.86
12.54
1190
Mexico
6.00
5.35
4.77
7.29
6.55
12.82
3610
Netherlands
10.00
10.00
10.00
9.98
9.35
21.67
20950
Peru
6.75
2.50
4.70
5.54
4.68
10.10
1490
Philippines
4.75
2.73
2.92
5.22
4.80
8.51
850
Portugal
5.50
8.68
7.38
8.90
8.57
17.20
9130
Spain
6.25
7.80
7.38
9.52
8.40
17.13
13590
Turkey
4.00
5.18
5.18
7.00
5.95
11.84
2970
Uruguay
6.50
5.00
5.00
6.58
7.29
12.96
3830
Venezuela
6.50
6.37
4.70
6.89
6.30
13.33
2840
Austria
9.50
10.00
8.57
9.69
9.60
20.76
23510
Germany
9.00
9.23
8.93
9.90
9.77
20.44
23560
Japan
10.00
8.98
8.52
9.67
9.69
20.36
31490
South Korea
6.00
0.00
5.30
8.31
8.59
14.23
7660
Switzerland
10.00
10.00
10.00
9.98
9.98
21.91
35760
Taiwan
6.75
8.52
6.85
9.12
9.16
17.62
10425
Denmark
10.00
10.00
10.00
9.67
9.31
21.55
26730
Finland
10.00
10.00
10.00
9.67
9.15
21.49
19300
Norway
10.00
10.00
10.00
9.88
9.71
21.78
25970
Sweden
10.00
10.00
10.00
9.40
9.58
21.56
24740
*Legality is derived from a principal components analysis of the covariance matrix from the five observed legality
variables. Because the first component accounts for 84.6% of the variance, we use its eigenvector as weights:
14
Efficiency of
Judiciary System
Rule of
Law
Risk of
Expropriation
William Davidson Institute Working Paper Number 308
Legality = .381* (Efficiency of the Judiciary) + .5778* (Rule of Law) + .5031* (Corruption) + .3468* (Risk of
Expropriation) + .3842* (Risk of Contract Repudiation)
15
William Davidson Institute Working Paper Number 308
Appendix Table 2: Legality and Economic Development
Efficiency of
Judiciary System
Rule of
Law
Corruption
Risk of
Expropriation
Average
Median
Standard Deviation
Minimum
Maximum
7.67
7.25
2.05
2.50
10.00
6.74
6.78
2.80
0.00
10.00
6.90
7.27
2.29
2.15
10.00
8.05
8.25
1.59
5.22
9.98
Efficiency of
Judiciary
Rule of Law
Corruption
Risk of
Expropriation
Contract Repudiation
Legality
GNP Per Capita
1.000
Summary Statistics
Risk of
Contract
Repudiation
7.58
7.57
1.79
4.36
9.98
16.05
16.54
4.32
8.51
21.91
GNP
Per Capita
(U.S. $)
11156
7660
10190
270
35760
1.000
0.906
1.000
Legality
Correlation Coefficients
0.643
0.793
0.656
1.000
0.848
0.910
1.000
0.845
1.000
0.635
0.803
0.738
0.880
0.950
0.853
0.841
0.949
0.839
0.961
0.944
0.871
1.000
0.930
0.871
Analysis of Covariance Matrix for the Five Legality Proxies
.1829, .0204, .0062, .0057, .00095
Eigenvalues
Share of Variance Captured in Maximum
Eigenvalue*
Condition of the
Covariance Matrix**
84.6%
192.5
*This is maximum eigenvalue divided by the sum of all five eigenvalues.
**This is maximum eigenvalue divided by the minimum eigenvalue.
16